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Raytheon to Provide TOW Missiles

Raytheon Company (RTN - Free Report) received a $349 million five-year, multi-year contract to provide heavy anti-tank, wireless precision-assault missiles for the U.S. government. Under this contract, Raytheon will deliver 6,676 of the new wireless TOW (tube-launched, optically tracked, wireless-guided) missiles that receive commands from the gunner through a wireless guidance link, eliminating the wire connection in previous generations of the missile.

With the wireless system built into the missile and the missile case, the next-generation TOW works with existing launch platforms, including the Improved Target Acquisition System, Improved Bradley Acquisition System, TOW2 Subsystem and M220 Ground TOW. The system performs exactly like the wire-guided version, enabling soldiers and Marines to continue using the proven weapon without changing tactics or requiring additional training.

The TOW weapon system, with the multimission TOW 2A, TOW 2B, TOW 2B Aero and TOW Bunker Buster missiles, is the premier long-range, precision anti-armor, anti-fortification and anti-amphibious landing weapon system used throughout the world today. TOW is in service in more than 40 international armed forces and integrated on more than 15,000 ground, vehicle and helicopter platforms worldwide. The TOW weapon system is expected to be in service with the U.S. military beyond 2025. December 2012 marks the 50th anniversary of the TOW Missile Program, with more than 650,000 missiles produced.

Based in Waltham, Massachusetts, Raytheon Company is a technology and innovation leader specializing in defense, homeland security and other government markets throughout the world. The company provides high-tech electronics, mission systems integration and other capabilities in the areas of sensing; effects; and command, control, communications and intelligence systems, as well as a broad range of mission support services.

Raytheon is one of the best-positioned companies among the large-cap defense players due to its non-platform-centric focus, as well as its strong order bookings and order backlog of more than $33.9 billion at the end of the first half of 2012.

Raytheon plays an important role in missile defense and is ideally positioned to help the United States and its allies achieve current and future missile defense goals. Given the declining trend in the U.S. defense spending, the company is one of the best-positioned companies among the large-cap defense players.

Revenue and earnings growth continue to be driven by a strong presence in the areas of Intelligence, Surveillance and Reconnaissance; air & missile defense systems; border security; air traffic management; training and homeland security; and cyber security. Also, its non-platform centric focus insulates it from cancellation or deferral of any specific platform programs.

Looking forward, the company enjoys strong order bookings and order backlog, an improving balance sheet, and growing cash flow, besides operational improvements. Future growth will be driven by its focus on ISR unmanned systems, training, cyber security, Standard Missile-6, Patriot, Zumwalt and THAAD.

However, these positives are offset by apprehensions over the future growth of the U.S. defense budget, the fate of high-cost programs, risks related to key project executions and order cancellations. Thus, over the longer run, we maintain our long-term Neutral recommendation on the stock. The company presently retains a short-term Zacks #2 Rank (Buy). The company mainly competes with L-3 Communications Holdings Inc. (LLL - Free Report) and FLIR Systems Inc. (FLIR - Free Report) .

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